Lately, international investing, particularly emerging market investing, has been pretty poor. It's hard to believe that, only two years ago, investors poured more than $16 billion into various emerging market mutual funds and exchange products. But then, the global slowdown came and growth, as well as stocks, have plummeted.

IN PICTURES: Top 10 Forex Trading Rules

While the recent market rallies have brought some of these assets back, the
iShares MSCI Emerging Markets Index ETF (NYSE:EEM), the major proxy for these markets, is still well off of its highs. This has led to the questioning of the theory of decoupling. Emerging markets, at one time, offered low correlation to the developed world. However, as these nations grew in prosperity, their fortunes became inter-twined with global economy. For example, China is now the United States' second largest trading partner, contributing $387 billion worth of trade. China will continue to grow and prosper over the upcoming decades, and long-term investors should plan according in their portfolios. The real question is, where the next "Chinas" are, and is there a way to participate in their growth?

Finding the Next China
Wall Street calls these emerging markets that have not fully emerged, "frontier economies." They include such nations as Peru, Nigeria, Croatia and Kazakhstan. Typically, these frontier environments are characterized by very fast growing economies combined with very small or hardly-existent equity markets. For example, at the Ugandan Securities Exchange, the average daily volume in terms of dollars is only around $200,000. Add this to the often unstable political environments, and you have reason why these aren't tourist hot spots.

But there are many positives to these frontier markets - many are rich in natural resources. As the long term global demand for oil, natural gas, gold and other commodities continues to increase, the prospects for growth in these nations is promising. In addition, frontier markets provide the low correlations that places like China and India used to provide. Comparing the three major international indexes, The MSCI World Developed, MSCI Emerging and S&P Frontier, to the S&P 500, we see that correlations are as follows, 0.95, 0.69 and 0.20, respectfully. (For more, see Go International With Foreign Index Funds.)

How to Capitalize on that Growth
While there are a few frontier market ADR's trading on major U.S. exchanges, such as South Africa's Sasol Limited (NYSE:SSL), most do not. Creating an allocation to these assets using individual stocks would be most daunting. For most investors, an index exchange product or actively managed mutual fund is a better choice. These can provide exposure to several different frontier markets, across several different sectors.

The oldest exchange traded fund in this sector is the Claymore/BNY Mellon Frontier Markets (NYSE:FRN). It also follows the broadest index, covering nations in South America, Asia, Africa and Eastern Europe. Currently, the fund contains 34 holdings equally spread across sectors with financials making up 28%. Companies within the ETF range from the semi-familiar and U.S. listed Chemical & Mining Co. of Chile Inc. (NYSE:SQM), and gold miner, Compania de Minas Buenaventura SA (NYSE:BVN), to the exotic Orascom Construction Industries of Egypt. The only troubling issue with the Claymore fund is that nearly 35% of the assets are located in Chile, and about 20% are located in Poland. While both Chile and Poland are great candidates for the next "emerging market of tomorrow," it may be disadvantageous to have over 50% of assets in two countries. Time will tell. The ETF charges 0.65% in expenses. (For more, see Five Ways To Find A Winning ETF.)

The remaining ETF's in the sector focus on the continent of Africa. The PowerShares MENA Frontier Countries ETF (NASDAQ:PMNA) concentrates its holdings in the oil and energy rich Middle East, comprising of investment in Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates. The appeal of the area is that energy-driven profits will spur growth in other areas, including infrastructure and healthcare. Analysts estimate that these nations will generate an oil surplus of $1.1 trillion - equal to about $30 million per resident. The fund currently holds 33 holdings with a surprising 50% weighting towards financials. (For more, see Finding Fortune In Foreign-Stock ETFs.)

The Bottom Line
For investors with a long term (possibly decades long) timeline, Frontier markets may make sense. These emerging nations of tomorrow offer significant growth potential for investors willing to take the risks. These could be the China's and Brazil's of the future. The two previous ETFs offer a broad way to wade into the sector and gain from that growth. (To learn more about ETFs, see our Exchange Traded Funds Tutorial.)

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  2. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  8. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!